Developer pushes private fix for public housing problem
Daily Journal of Commerce
by Kennedy Smith
07/13/2007
The Portland Development Commission, City Hall and various nonprofit groups can’t agree on how much there is, but they all agree there’s a lack of affordable housing in Portland. The nonprofit Northwest Pilot Project estimates there are only 3,000 units of affordable housing in the city. PDC says the number is closer to 10,000. And affordable-housing builder Host Development Inc. estimates Portland needs around 12,000 more units to close the gap.
Without public subsidy, says Ted Gilbert of commercial investment firm Gilbert Bros., developers rarely build affordable housing. Because construction costs per unit can reach up to $200,000, selling units at below-market rates means the developer loses money.
Gilbert, who is chairman of Host’s board and a board member of the Portland Affordable Housing Preservation Trust, argues that the smart way to fill the affordable housing gap is to buy existing buildings – which sell for as low as $30,000 per unit – rehab them and put them on the market at a price low-income families can afford. It’s a private-sector approach to what he says is considered largely a public problem.
DJC: Median family income aside, what does affordable housing really mean?
Ted Gilbert: It’s a large spectrum. Affordable housing ranges all the way from homeless to very low-income rental and special-needs populations to work-force housing on a rental basis to affordable homeownership and trying to reverse the family flight that’s going on in this community right now. Young families with children are leaving the city in search of more affordable housing.
If you don’t have to spend more than 30 percent of your income, according to the government, that’s affordable. For somebody making minimum wage, or single moms, which is our single biggest demographic at Host, 30 percent of median is a modest apartment, let alone getting to own something. But affordable housing has developed as this cottage industry.
DJC: What does that mean?
Gilbert: There’s competition. There’s a zero-sum gain where everybody feels like they’re competing for a finite and scarce resource, which is primarily federal, government-subsidized money, whether it’s low-income tax credits or TIF money, a 30 percent set-aside. They’re all competing. There’s a mindset that, if someone else is getting it, there’s less for my constituency. That’s counterproductive for the whole community.
DJC: How do you change that?
Gilbert: I look at it from a private-sector model. Call it enlightened capitalism. We have to recognize that it’s in our self interest to have a healthy housing climate here. There are ways you can make it pencil with affordable housing without these enormous subsidies. The traditional method isn’t bad, but it’s a limited resource, and frankly it’s a tremendously inefficient delivery mechanism.
Most of the new affordable housing that you hear of on a rental basis is new construction that today will cost you probably $200,000 a unit. It may help with neighborhood resurgence, but even if it’s going lightning fast, it’s going to take two years to build. How many are going to become unaffordable in those two years?
We can buy existing buildings faster and cheaper than new buildings.
DJC: Is there enough inventory in the metro area to turn existing buildings into affordable housing?
Gilbert: Last time I heard, the housing gap for those most in need of affordable housing was 12,000 units. The number that get built a year through that traditional construction mechanism is maybe a couple hundred in two years. We will never get ahead unless we can go to existing buildings and preserve them.
We’ve bought 525 units to date. It’s not a ton, I grant you. But the model works. We buy an existing unit. My guess is, of the 525 units, our average price per unit of purchase is under $30,000 a unit. I’ll bet you the average MFI is probably under 30 percent.
DJC: So you see taking a private-sector approach to affordable housing as the new model?
Gilbert: It’s a model. I don’t pretend that it solves every problem. This is not a one-size-fits-all deal.
If the primary mechanism for affordable housing is to build new with the delivery mechanism of bonds and tax credits at $200,000 a unit, you will never even start to get your arms around it, let alone solve it.
The existing delivery system for most groups is development fee-oriented. You have to compete with the private sector to buy land, you have to finance it, get an architect, the cost per unit goes up, and most of the new affordable housing that gets built is for around 60 percent median family income. Why? Because that’s the lowest you can go for the amount you paid to build the housing.
DJC: So it comes down to return on investment.
Gilbert: There is no return on investment other than a development fee for the developer and a tax credit that goes to the investor and the bankers that make the loans and the underwriters. It makes sense to buy existing at $30,000 a unit. You rehab in six months. If you buy it right, you may not even need subsidy.
DJC: What are the disadvantages of buying existing buildings?
Gilbert: It’s not new. The useful life isn’t as long. Seismically, there are code issues. Hopefully, they’re nice, pretty buildings. The existing building may be charming, maybe not. Maybe it’s just your pure, vanilla, garden court apartment that’s not in great condition. You may rehab it, but it’s never going to be a new building.
DJC: What are your frustrations with getting affordable housing built?
Gilbert: Knowing that the model works, particularly in Portland. The motivation is there, the model is there, the resources are there, but land is a challenge. Process is frustration, whether it’s entitlement, permitting. That can be downright frustrating. It’s costing us money on land holding costs.
DJC: What do you think about the PDC’s 30 percent tax increment financing set-aside for affordable housing in urban renewal areas?
Gilbert: The TIF set-aside, in theory, I’m a supporter of. I know it was well-intentioned. But I testified to PDC and City Council. I said, don’t take a one-size-fits-all approach because Lents is not the same as the River District. I would argue that in the River District, South Waterfront, when the tipping point had been reached, where the private sector saw that it was worth their risk capital to get a return to do affordable housing, it was going. They were rocking and rolling.
The TIF set-aside could be wonderful. Lents needs jobs. Gateway needs infrastructure. My argument to City Council and to PDC was, let’s do the TIF set-aside but look at each district individually, look at each of their needs and make it flexible.
DJC: Is there an unhealthy housing climate here in Portland?
Gilbert: That’s a broad, general statement. When the rest of the country is struggling mightily in our housing market, we still have a relatively good housing market here. Having said that, people on the lower edges of middle class and below are leaving Portland.
Incomes since the 1970s haven’t been close to keeping pace with escalating housing prices. Part of that is manmade – our urban growth boundary. I personally support the UGB. It’s a tremendous planning tool, and frankly everyone in the real estate business, they owe some of every dollar they make to the UGB. But it comes at a price. The price of land has everything to do with the UGB.
My business is largely perception, and if the perception is limited quantity, it creates a land-rush mentality. That is what we had in this community, and it’s not going away any time soon. It’s supply, demand and perception, and that ain’t going to change.
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